What is Behind Increasing Income Inequality?

September 7, 1999

In a few weeks, the Census Bureau will be releasing its annual report on poverty and income distribution. It will probably show a further increase in income inequality. This trend has accelerated during the Clinton years.

Among the reasons often given for increasing income inequality is the decline of unionization. That is because union workers historically have had higher wages than nonunion workers.

Last year, median weekly earnings for union workers were $659 and $499 for nonunion.

Thus the decline in unionization as a share of the labor force from 23 percent in 1968 to 13.9 percent in 1998 may explain some of the slow growth in incomes by those at the lower end of the distribution.

A 1991 study by economist David Card estimated that deunionization had reduced the incomes of those in the lowest 20 percent households by 4.3 percent between 1973 and 1987.

But a new study from the Federal Reserve Bank of Atlanta finds that deunionization "played at most a minor role" in slow wage growth between 1974 and 1994.

The conflicting findings may be explained by the fact that the union wage premium has declined significantly in recent years. In 12 of the last 19 years, nonunion workers have seen greater increases in compensation than union workers. The latest data from the Bureau of Labor Statistics show that in the 12 months through June, nonunion workers have seen their compensation rise 3.4 percent, while that for union workers has risen just 2.7 percent.

It is not surprising that some of the biggest employment losses have been in the most heavily unionized industries, while much of the growth in the U.S. economy in recent years has been in the high-tech sector, which has been hostile to union organizing efforts.